Volcker blames global markets for Asian mayhem

Volcker blames global markets for Asian mayhem

HONG KONG (Reuters): Weak banks, crony capitalism, excessive
borrowing and inflated currencies have all borne their share of
blame for the Asian financial crisis.

But on Monday, one of the world's most prominent former
central bankers pointed the finger at a different culprit --
financial markets themselves.

"I would submit to you that there is every indication that
what we face is not a localized problem in...Southeast Asia...but
the latest manifestation of a more systemic crisis of global
capitalism -- and it is one that deserves our attention," Paul
Volcker, chairman of the U.S. Federal Reserve from 1979 to 1987,
told an audience in Hong Kong.

Speaking to the Hong Kong/U.S. Economic Cooperation Committee,
Volcker said financial market instability was nothing new.

In fact, Southeast Asia's recent affliction and past crises in
Latin America, Scandinavia and the Czech Republic confirmed the
susceptibility of all economies, good and bad, to an erratic
global financial system out of whack with fundamentals, he said.

Any exchange rate system that generated a 60 percent swing in
the yen-dollar rate over three years was clearly failing to
reflect economic fundamentals smoothly and accurately, he said.

The yen has fallen to about 132.5 to the U.S. dollar on Monday
from 80 in 1995.

"If the exchange rate system is that far out of keeping with
underlying, economic, tangible reality it is no wonder we have
occasional crises that overwhelm smaller countries," he said.

"My hope is that the constructive result of this crisis will
indeed be a serious look at a financial system that does seem to
me to need repair," Volcker said.

Some analysts have argued that over a 10-year period, Asia
built its economic system around a strong yen.

When the yen started to weaken, Asian currencies tied to the
U.S. dollar quickly became over-valued, causing economic
distortions that attracted the attention of currency speculators.

But Volcker said it was instructive to keep the size of
Southeast Asia's economies in mind.

The total banking system in Thailand, Indonesia or Argentina
roughly matched the size of a medium-sized, regional bank in the
United States, he said.

"What I think we are seeing here is a manifestation of the
volatility of financial markets coming up against small emerging
economies that did not used to participate in these markets," he
said, adding that fund managers seeking performance now moved
many billions of dollars through markets, often on a whim.

Despite the risks that this volatility posed to smaller
nations, Volcker argued that only greater openness provided a
solution.

For smaller nations, tying up with huge multinationals was one
sure-fire way of withstanding the whip-saw moves of global
capital, he said.

Volcker said he also expected to see further currency
integration between smaller countries and larger neighbors, with
currencies anchored along regional lines, as in Europe.